Restricting Pensions Tax Relief
On 14 October 2010 the Government provided detail on how it will restrict tax relief on pension savings from 6 April 2011. The key features of the new regime - which will only affect those who accrue or have accrued substantial pension benefits - are as follows.
Annual Allowance (AA)
The revised AA is £50,000 from April 2011. The AA will be fixed until at least 2015/16.
Managing peaks
If an individual exceeds the AA in any tax year, rather than immediately triggering additional tax, he or she can carry forward any unused AA from the previous three years to offset against this year's benefit accrual. This commenced immediately with a notional AA of £50,000 - and the new method for valuing accrual (i.e. benefits earned) in defined benefit pension schemes (see below) - applying for the last three years.
Pension Input Period
As regards the Royal Mail Pension Plan (including associated AVC arrangements), benefits earned in the Plan year (1 April to 31 March) are compared against the AA. (Other pension schemes may have a different pension input period.)
Exemptions
All benefit accrual will be subject to the AA, except in the cases of death or retirement in serious (i.e. terminal) ill health. The AA will apply in every year that pension savings are made.
Tax Relief
Benefits earned within the AA during the pension input period will receive tax relief at the employee's full marginal rate of tax. Any benefits built up in excess of the AA will be taxed at the employee's full marginal rate.
For the main Plan (including Addplan), and other defined benefit pension schemes, 'benefits earned' means the increase in value of accrued benefits over the year after allowing for inflation and using a multiplier of 16 for the increase in pension.
For AVC arrangements (other than Addplan which provides a defined benefit), and other defined contribution pension arrangements, 'benefits earned' relates to total contributions paid in the year by employee and employer.
Lifetime Allowance (LTA)
The LTA will reduce to £1.5 million from April 2012. For LTA purposes, pensions from the main Plan and other defined benefit pension schemes are multiplied by 20.
Example of Benefits Earned
An example of benefits earned in a year, is attached.
Downloads
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| File | Size | Uploaded | Link |
|---|---|---|---|
 Benefits Earned Example AB |
46.05KB | 12-09-2011 14:44 | Download |
| Benefits Earned Example C |
44.63KB | 12-09-2011 14:44 | Download |